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Trusts • Express Private Trusts
TRUSTS#003
Legal Definition
Generally, trust assets are freely alienable by default, meaning creditors can potentially reach them. However, a settlor can specifically set up the trust with protections to prevent creditors from accessing the assets.
Plain English Explanation
People often think that if you put assets into a trust, they become magically protected. Unfortunately, it's not that simple! Just setting up a regular trust does not create an impenetrable force field around those assets. Creditors can still try to grab them if you owe them money.
Now there are ways to structure more complex trusts that make it harder for creditors to access the assets. But for plain old basic trusts, creditors can still reach the trust assets if they have a legal right to be repaid from the trust creator's funds. The reason this rule exists is to prevent people from hiding money in trusts solely to avoid paying legitimate debts. The law doesn't want to facilitate that kind of sketchy behavior.
Of course, there are good reasons to create trusts too - like tax planning or managing an inheritance for your kids. Just don't expect a plain vanilla trust to necessarily stop creditors from taking trust assets if you owe them money!
Now there are ways to structure more complex trusts that make it harder for creditors to access the assets. But for plain old basic trusts, creditors can still reach the trust assets if they have a legal right to be repaid from the trust creator's funds. The reason this rule exists is to prevent people from hiding money in trusts solely to avoid paying legitimate debts. The law doesn't want to facilitate that kind of sketchy behavior.
Of course, there are good reasons to create trusts too - like tax planning or managing an inheritance for your kids. Just don't expect a plain vanilla trust to necessarily stop creditors from taking trust assets if you owe them money!
Hypothetical
Hypo 1: Sam creates a trust and transfers $500,000 into it. A year later, Sam is sued by Bob for failure to pay on a business loan. Bob wins a judgment against Sam for $100,000. Bob seeks access to the trust assets to satisfy the judgment. Result: Since this is a normal trust, Bob can likely reach the trust assets despite Sam's attempt to shield his money. The trust does not make the assets untouchable.
Hypo 2: Amy creates a special discretionary supplemental needs trust for her disabled sister with assets meant to enhance quality of life. When Amy dies years later, her credit card lender seeks trust assets to satisfy Amy's debts. Result: While normal trusts don't defeat creditors, special trusts like these may. The social policy behind them carries more weight than creditors' reach. So a court may protect these assets.
Hypo 2: Amy creates a special discretionary supplemental needs trust for her disabled sister with assets meant to enhance quality of life. When Amy dies years later, her credit card lender seeks trust assets to satisfy Amy's debts. Result: While normal trusts don't defeat creditors, special trusts like these may. The social policy behind them carries more weight than creditors' reach. So a court may protect these assets.
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